Save Early for Retirement

At what age is it better to save for retirement? In your early years of working, money is probably tight. It’s hard to find the extra money to save towards such a far end goal, when the rent needs to be paid, and you have a more immediate need to build emergency savings. You might think that waiting until later in life to save for retirement, when your income is likely higher and you can more likely afford to do so, would be the best option.

Or maybe not.

Take Frankie and Johnny. Both are age 20 and have decent jobs. Frankie and Johnny want to have money for retirement, but take two different savings tracks. Frankie wants to save now, when she has fewer expenses; she anticipates she may have to stop saving as expenses rise. Even though he has a good job, Johnny thinks his current expenses are too high to justify saving right now; he wants to wait until he can get his income up before saving.

Both anticipate they will save $200 per month, and estimate they will earn 6% on their investments, compounded monthly. They both plan on retiring at age 65. The only difference is the point in time when Frankie stops saving and Johnny starts.

The 5-Year Plan

In this plan, Frankie contributes for five years, then stops. Johnny starts saving after five years, and saves for the next 40.

Frankie contributes at total of $12,000 over the five-year period. At age 65, she has a retirement balance of $153,665. Johnny, in contrast, contributes $96,000 and ends up with $400,290. Johnny contributes in total eight times what Frankie contributes, and realizes 2.6 times Frankie’s results. Still, $400,290 is more comforting than $153,665. To match Johnny’s results, Frankie would have needed to contribute $5,708 per month for the first five years; that’s 28.5 times the original $200 per month.

The 10-Year Plan

In this scenario, the pivot point is 10 years. Frankie contributes a total of $24,000 over that 10 year period, while Johnny goes on to contribute $84,000 over the course of 35 years. At retirement, Frankie has a balance of $267,588. Johnny has a balance of $286,367. Johnny contributes in total 3.5 times what Frankie contributes, for only 7% more in his retirement account. To match what Johnny ends up with, Frankie would have needed to save only 7% more, or $214.04 per month.

The 15-Year Plan

Let’s take this out to 15 years. Frankie saves a total of $36,000 and ends up with $352,047 at retirement. Johnny contributes $72,000 and has $201,908 at retirement. Johnny contributes twice as much as Frankie (in twice as many years), but ends up with 42.6% less. To match Frankie’s gross balance of $352,047, Johnny would have needed to save 75% more, or $348.72 per month.

A Split Pivot Point

Let’s throw one more scenario into the mix. Let’s go back to the five-year plan, where Johnny ends up with so much more money than Frankie. This time around, let’s have Frankie save for 20 years, starting at age 20. Johnny still waits five years, but then contributes for the next 40. In this case, Frankie ends up with $414,663, compared with Johnny’s $400,290. But Frankie only needs to save half as much as Johnny to end up with nearly the same results.

So what does this all mean?

The key point is that the longer you wait, the more you pay, the longer you pay, and sometimes the less you end up with. This is the time value of money.

It is better to live leanly in early adulthood, even though you typically have less income, because you also typically have fewer obligations and perhaps are more used to being “thrifty”. Later, when income has risen, so generally have your expenses, and it’s hard to cut your lifestyle down at that point. Saving early gives you a worthwhile discipline that will always serve you well.

If you have put things off, don’t stress; it’s not too late to put a plan into action. Just know that you will need to pay more for the privilege. What is important is to not put it off any longer. Don’t let time pass your money by.